Irrevocable Non-Grantor Trust Clarification
Course: Estate Planning
Lesson 9: Income Taxation of Trusts and Estates
Student Question:
I wanted to make sure I understand this correctly. Irrevocable non grantor tax is on the trust. If it distributes the income, then the tax is on the beneficiaries. The only case in which an Irrevocable non grantor trust doesn’t distribute the entire income is in a case of a complex trust. Hence, this tax is only applicable for complex trusts.
Did I get it right?
Instructor Response:
Hi
You’re very close. An irrevocable non-grantor trust is a separate taxpaying entity, so income retained in the trust is taxed to the trust, while income distributed (or required to be distributed) is taxed to the beneficiaries. The key distinction is between simple and complex trusts: a simple trust must distribute all its accounting income each year, so it generally does not pay income tax itself, whereas a complex trust is allowed to accumulate income, and any income it retains is taxed at the trust level. So the tax rules apply to all non-grantor trusts, but only complex trusts typically end up paying income tax because they are permitted to retain income.
Let me know any other questions!
